TY - JOUR
T1 - Tests for bounded rationality with a linear dynamic model distorted by heterogeneous expectations
AU - Baak, Saang Joon
PY - 1999/9
Y1 - 1999/9
N2 - The purpose of this paper is to develop a methodology which will use economic data to detect the existence of boundedly rational economic agents. The bounded rationality model presented in this paper generalizes a linear dynamic rational expectations model by nesting two types of expectations. In this paper, it is claimed that the bounded rationality model as presented can be transformed into an optimal regulator problem with distortions. As a result, the methodologies developed by the optimal control theory can be used to solve the model. The likelihood function for the model is constructed by the Kalman filtering using the solution of the model. Maximum Likelihood Estimation (MLE) is performed to test for bounded rationality in the U.S. cattle market for the period from 1900 to 1990. The empirical results indicate that some fraction of economic agents in the market are boundedly rational.
AB - The purpose of this paper is to develop a methodology which will use economic data to detect the existence of boundedly rational economic agents. The bounded rationality model presented in this paper generalizes a linear dynamic rational expectations model by nesting two types of expectations. In this paper, it is claimed that the bounded rationality model as presented can be transformed into an optimal regulator problem with distortions. As a result, the methodologies developed by the optimal control theory can be used to solve the model. The likelihood function for the model is constructed by the Kalman filtering using the solution of the model. Maximum Likelihood Estimation (MLE) is performed to test for bounded rationality in the U.S. cattle market for the period from 1900 to 1990. The empirical results indicate that some fraction of economic agents in the market are boundedly rational.
KW - Bounded rationality
KW - Heterogeneous expectations
KW - Kalman filtering
KW - Maximum likelihood estimation
KW - Optimal regulator problem with distortions
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U2 - 10.1016/s0165-1889(98)00082-7
DO - 10.1016/s0165-1889(98)00082-7
M3 - Article
AN - SCOPUS:0033195761
VL - 23
SP - 1517
EP - 1543
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
SN - 0165-1889
IS - 9-10
ER -